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Identification of Beneficial Owner
The EU Commission proposal would require member states to adopt and
enforce minimum standards for paying agents to establish the
identity of beneficial owners receiving interest payments. The EU
Council proposal would provide more detailed procedures for this
purpose that would apply to contractual relationships or
transactions entered into after January 1, 2004. In particular, the
EU Council proposal would require the identity of the beneficial
owner to be established on the basis of a passport or an official
identity card presented by the beneficial owner. If the beneficial
owner’s address does not appear on these documents, the
paying agent would establish the address based on other documentary
proof of identity presented by the beneficial owner. In addition,
the paying agent would be required to establish the date and place
of birth of the beneficial owner by reference to a passport or
official identity card if the beneficial owner’s tax
identification number did not appear on the required
documentation.

Reporting obligations under the savings directive generally do
not arise where interest is paid to a separate legal entity or a
UCITS fund. Paying agents acting as financial intermediaries would
be required to report interest receipts that are attributable to
beneficial owners. Prior to January 1, 2004, paying agents
generally would be permitted to rely on existing customer
information.

Definition of “Interest Payments”
The EU Commission proposal would include within the definition of
“interest payments” income realized upon the sale,
refund, or redemption of shares in UCITS funds and non-EU funds if
these funds invested more than 40 percent of their assets in debt
instruments. This threshold level of investments in debt
instruments would be lowered to 15 percent after the seven-year
transitional period.

The EU Council proposal would raise the threshold level of
investments in debt instruments after the seven-year transitional
period from 15 percent to 25 percent. The Council also has amended
the text to require explicitly a fund’s indirect investments
in debt instruments made through investments in other funds to be
included in computing a fund’s level of debt investments.
Therefore, “funds of funds” would be required to
consider debt investments made by the funds in which they invest
for determining whether the income realized upon the sale of
“funds of funds” shares would qualify as
“interest payments” under the directive. For income
realized upon the sale of fund shares, the Council’s proposal
also would permit EU member states the discretion to include as
“interest payments” only income attributable to gains
directly or indirectly derived from interest payments.

Information Reporting by the Paying Agent
The EU Commission proposal would specify the minimum information
that must be reported by EU member states under the directive. The
EU Council proposal would permit EU member states to restrict the
amount of reportable information under the directive to (1) the
total amount of interest or income paid and (2) the total amount of
proceeds from a sale, redemption, or refund.

The savings directive generally was designed to provide a
mechanism for a member state of the European Union to collect tax
on savings income in the form of interest paid on savings products
purchased by its citizens in another EU member state. The savings
directive has significance to collective investment vehicles
because it defines reportable interest payments under the directive
to include income derived from interest that is distributed by a
UCITS fund or an “undertaking for collective
investment” established outside the European Union, including
U.S. mutual funds sold in the European Union, and income realized
upon the sale of shares of these funds if a certain percentage of
the funds’ assets consist of debt instruments. For this
purpose, it is irrelevant whether an interest payment is from EU or
non-EU sources, so long as the distribution is made by a
“paying agent” located within the European Union. Under
the “exchange of information” approach adopted by the
savings directive, each EU member state automatically would be
required to report interest paid in that state to individual
residents of other EU member states. During a seven-year
transitional period, paying agents located in Austria, Belgium, and
Luxembourg generally would be permitted to withhold tax at
prescribed rates under the savings directive, in lieu of applying
an exchange of information system.

In order to prevent avoidance of the savings directive (e.g.,
through the use of paying agents located in non-EU countries), the
European Union intends to negotiate with third countries for
implementation of similar measures. It is expected that the final
adoption of the savings directive, in large part, will depend on
whether third countries, including Switzerland and the United
States, agree to adopt exchange of information measures similar to
those proposed under the directive. The European Union presently
intends to complete its third party negotiations and unanimously
approve the final text of the savings directive by December 31,
2002 and to have member states implement the savings directive by
January 1, 2004.